A mathematical approach to order book modeling
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Publication:2853371
DOI10.1142/S0219024913500258zbMATH Open1292.91197arXiv1010.5136MaRDI QIDQ2853371FDOQ2853371
Authors: Frédéric Abergel, Aymen Jedidi 
Publication date: 21 October 2013
Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)
Abstract: Motivated by the desire to bridge the gap between the microscopic description of price formation (agent-based modeling) and the stochastic differential equations approach used classically to describe price evolution at macroscopic time scales, we present a mathematical study of the order book as a multidimensional continuous-time Markov chain and derive several mathematical results in the case of independent Poissonian arrival times. In particular, we show that the cancellation structure is an important factor ensuring the existence of a stationary distribution and the exponential convergence towards it. We also prove, by means of the functional central limit theorem (FCLT), that the rescaled-centered price process converges to a Brownian motion. We illustrate the analysis with numerical simulation and comparison against market data.
Full work available at URL: https://arxiv.org/abs/1010.5136
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Markov chainFCLTlimit order bookbid-ask spreadgeometric mixingstochastic stabilityagent-based modelingorder flow
Applications of continuous-time Markov processes on discrete state spaces (60J28) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Financial applications of other theories (91G80)
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Cited In (37)
- Dynamic optimal execution in a mixed-market-impact Hawkes price model
- Optimal inventory management and order book modeling
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- HYDRODYNAMIC LIMIT OF ORDER-BOOK DYNAMICS
- Inventory accumulation with multiple products
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- Order book model with herd behavior exhibiting long-range memory
- ON BOUNCING GEOMETRIC BROWNIAN MOTIONS
- Long-time behavior of a Hawkes process-based limit order book
- Disentangling and quantifying market participant volatility contributions
- Analysis of a decision model in the context of equilibrium pricing and order book pricing
- Clearing price distributions in call auctions
- A one-level limit order book model with memory and variable spread
- Quasi-likelihood analysis for marked point processes and application to marked Hawkes processes
- Statistical inference for ergodic point processes and application to limit order book
- Scaling limit of a limit order book model via the regenerative characterization of Lévy trees
- Optimal liquidity-based trading tactics
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- Modelling the shape of the limit order book
- Semi-Markov model for market microstructure
- Optimal market dealing under constraints
- Second order approximations for limit order books
- Global order routing on exchange networks
- Deep learning for limit order books
- Estimation of correlation between latent processes
- Stationary distribution of the volume at the best quote in a Poisson order book model
- Modelling intensities of order flows in a limit order book
- A scaling limit for limit order books driven by Hawkes processes
- Analysis of order book flows using a non-parametric estimation of the branching ratio matrix
- Limit order books, diffusion approximations and reflected SPDEs: from microscopic to macroscopic models
- Variable diffusion in stock market fluctuations
- Confidence interval for correlation estimator between latent processes
- On the forward algorithm for stopping problems on continuous-time Markov chains
- High Frequency Trading and Asymptotics for Small Risk Aversion in a Markov Renewal Model
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- Ergodicity and diffusivity of Markovian order book models: a general framework
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